Deposit Insurance Funds: Compliance with Obligation and Repayment
Requirements as of December 31, 1993 (Letter Report, 08/17/94,
GAO/AIMD-94-162).

The Federal Deposit Insurance Corporation's (FDIC) maximum obligation
calculations show that as of December 31, 1993, (1) the Bank Insurance
Fund's (BIF) assets and other funding sources exceeded its obligations
by $44 billion and (2) the Savings Association Insurance Fund's (SAIF)
assets and other funding sources exceeded its obligations by $1.2
billion.  Nothing came to GAO's attention that would lead it to question
the reasonableness of the amounts reported.  As of December 31, 1993,
neither BIF nor SAIF had borrowed funds for insurance losses from the
U.S. Treasury, although changing economic conditions and other factors
could affect the need for future borrowings.  FDIC anticipates that
neither BIF nor SAIF will need to borrow money from Treasury to cover
insurance losses through fiscal year 1999 and that BIF and SAIF will
achieve their designated ratio of reserves to insured deposits of 1.25
percent by 1996 and 2004, respectively. FDIC borrowed no funds from the
Federal Financing Bank for working capital needs during the quarter
ending December 31, 1993.  FDIC repaid the outstanding balance of BIF's
previous borrowings from the Federal Financing Bank on August 6, 1993.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-94-162
     TITLE:  Deposit Insurance Funds: Compliance with Obligation and 
             Repayment Requirements as of December 31, 1993
      DATE:  08/17/94
   SUBJECT:  Bank failures
             Savings and loan associations
             Authority to borrow from Treasury
             Funds management
             Total obligational authority
             Compliance
             Reimbursements to government
             Insurance losses
             Future budget projections
             Insured commercial banks
IDENTIFIER:  Bank Insurance Fund
             Savings Association Insurance Fund
             BIF
             SAIF
             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1994

DEPOSIT INSURANCE FUNDS -
COMPLIANCE WITH OBLIGATION AND
REPAYMENT REQUIREMENTS AS OF
DECEMBER 31, 1993

GAO/AIMD-94-162

Deposit Insurance Funds


Abbreviations
=============================================================== ABBREV

  BIF - Bank Insurance Fund
  FDI - Federal Deposit Insurance
  FDIC - Federal Deposit Insurance Corporation
  FDICIA - Federal Deposit Insurance Corporation Improvement Act of
     1991
  FFB - Federal Financing Bank
  FIRREA - Financial Institutions Reform, Recovery, and Enforcement
     Act of 1989
  FSLIC - Federal Savings and Loan Insurance Corporation
  OMB - Office of Management and Budget
  RTC - Resolution Trust Corporation
  SAIF - Savings Association Insurance Fund

Letter
=============================================================== LETTER


B-251583

August 17, 1994

The Honorable Donald W.  Riegle, Jr.
Chairman
The Honorable Alfonse M.  D'Amato
Ranking Minority Member
Committee on Banking, Housing,
 and Urban Affairs
United States Senate

The Honorable Henry B.  Gonzalez
Chairman
The Honorable Jim Leach
Ranking Minority Member
Committee on Banking, Finance
 and Urban Affairs
House of Representatives

This is the sixth of our required reports on the Federal Deposit
Insurance Corporation's (FDIC) quarterly compliance with the maximum
obligation limitation established by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA).  This obligation
limitation applies separately to both the Bank Insurance Fund (BIF),
insurer of commercial bank deposits, and the Savings Association
Insurance Fund (SAIF), insurer of savings association deposits, and
is designed to provide assurance that each fund's assets and other
funding sources are sufficient to fund its obligations.  FDIC
administers both insurance funds. 

FDICIA also requires us to report on BIF's and SAIF's ability to
repay amounts borrowed from the Department of the Treasury for
insurance losses, and to analyze data related to the sale of assets
of failed institutions.  As agreed with your respective offices, the
latter requirement was modified to include an assessment of whether
total collections from the management and disposition of assets
acquired from failed institutions would be sufficient to repay any
existing working capital borrowings. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

FDIC's maximum obligation limitation calculations show that as of
December 31, 1993, (1) BIF's assets and other funding sources
exceeded its obligations by $44 billion and (2) SAIF's assets and
other funding sources exceeded its obligations by $1.2 billion.\1
Based on our review of FDIC's calculations and explanatory notes for
both BIF and SAIF, nothing came to our attention that would lead us
to question the reasonableness of the amounts reported as of December
31, 1993.  Through December 31, 1993, FDIC allocated the entire
amount of Treasury borrowing authority to BIF. 

As of December 31, 1993, neither BIF nor SAIF had borrowed funds for
insurance losses from the U.S.  Treasury.  The need for future
borrowings for insurance losses, and each fund's ability to repay any
such borrowings, depends on the impact of future economic conditions
on the number of financial institution failures, the cost of these
failures to the insurance funds, future assessment revenues, and
other funding alternatives.  Currently, FDIC anticipates that neither
BIF nor SAIF will need to borrow funds from Treasury to cover
insurance losses through fiscal year 1999.  Additionally, FDIC
anticipates that BIF will achieve its designated ratio of reserves to
insured deposits of 1.25 percent by 1996 and that SAIF will achieve
its designated ratio of reserves to insured deposits of 1.25 percent
by 2004. 

FDIC borrowed no funds from the Federal Financing Bank (FFB) for
working capital needs during the quarter ending December 31, 1993. 
FDIC repaid the outstanding balance of BIF's previous FFB borrowings
on August 6, 1993. 


--------------------
\1 As discussed in our report, Deposit Insurance Funds:  Compliance
With Obligation and Repayment Requirements as of September 30, 1993
(GAO/AIMD-94-100, May 9, 1994), at September 30, 1993, BIF's and
SAIF's assets and other funding sources also exceeded their
obligations by $44 billion and $1.2 billion, respectively. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Section 15(c) of the Federal Deposit Insurance (FDI) Act, as amended
by FDICIA, requires that FDIC determine the limitation on outstanding
obligations for BIF and SAIF based on a maximum obligation limitation
formula.  In general, the formula involves comparing the assets and
liabilities of each of the two insurance funds to ensure that at any
point in time, each fund's assets are sufficient to cover its
liabilities.  The obligation limitation precludes FDIC from issuing
or incurring obligations for BIF or SAIF if, after doing so, total
outstanding obligations of each fund, considered separately, would
exceed the sum of its available funding sources.  The obligation
formula is designed to provide assurance that the obligations of each
fund are adequately supported by its assets and available funding
sources and to alert the Congress to FDIC's funding needs. 

FDICIA defines funding sources for each fund as (1) its cash and cash
equivalents, (2) the amount equal to 90 percent of the fair market
value of its assets other than cash and cash equivalents, and (3) its
allocated portion of the total amount authorized to be borrowed from
Treasury under section 14(a) of the FDI Act, as amended by FDICIA. 
Section 14(a) of the FDI Act, as amended by FDICIA, provided FDIC
with $30 billion in borrowing authority with Treasury to cover
insurance losses.  The borrowing authority is available for both BIF
and SAIF, but FDICIA does not specify how the $30 billion should be
allocated between the two funds.  In defining obligations, the act
requires that FDIC identify all guarantees (excluding deposit
guarantees), any amounts borrowed from Treasury or FFB pursuant to
section 14 of the FDI Act, and any other obligations for which the
funds have a direct or contingent liability.\2


--------------------
\2 As agreed to by the Senate and House Banking Committees, FDIC's
estimated liability for future financial institution failures or
assistance transactions is excluded in determining each fund's total
obligations where there is no contractual agreement between FDIC and
the troubled institutions comprising the estimated liability. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The objectives of this review were to determine whether (1) BIF and
SAIF have complied with the statutory maximum obligation limitation
specified in FDICIA for the quarter ending December 31, 1993, and (2)
BIF and SAIF have borrowed from the U.S.  Treasury for insurance
losses and what factors may affect the need for future borrowings, as
well as BIF's and SAIF's ability to meet established repayment
schedules when borrowings occur. 

To determine whether BIF and SAIF complied with the statutory maximum
obligation limitation specified in FDICIA for the quarter ending
December 31, 1993, we reviewed the completeness and reasonableness of
the components and explanatory notes in FDIC's fourth quarter
calendar year 1993 maximum obligation limitation reports for BIF and
SAIF.  For this review, we performed procedures more limited in scope
than those conducted in an actual financial statement audit of the
insurance funds.  To obtain assurance as to the reasonableness of
fourth quarter 1993 balances, we relied on the work performed in
connection with our audits of BIF's and SAIF's 1993 financial
statements.\3 We compared the components of FDIC's maximum obligation
limitation calculations for BIF and SAIF to the provisions of FDICIA
and to each fund's December 31, 1993, audited Statement of Financial
Position and corporate general ledger trial balance.  We believe our
procedures provide us with sufficient assurance to draw conclusions
regarding FDIC's fourth quarter 1993 compliance with its maximum
obligation limitation. 

To determine whether BIF and SAIF had borrowed from the U.S. 
Treasury for insurance losses, what factors may affect the need for
future borrowings, and whether BIF and SAIF will be able to meet
established repayment schedules, we reviewed the status of FDIC
borrowings from Treasury as of December 31, 1993.  We also discussed
anticipated borrowing needs with FDIC officials and reviewed FDIC's
most recent projections of potential funding needs for BIF and SAIF. 

We performed our work at FDIC's headquarters offices in Washington,
D.C., and Arlington, Virginia, from April through June 1994.  We
performed our work in accordance with generally accepted government
auditing standards.  However, the scope of our work was substantially
less than that of a financial audit and, as such, did not include a
review of FDIC's internal control structure.  Our review of
compliance with laws and regulations was limited to BIF's and SAIF's
compliance with the maximum obligation limitation established by
FDICIA.  While we did not obtain written comments on this report, we
discussed its contents with cognizant FDIC officials and have
incorporated their comments where appropriate. 


--------------------
\3 Financial Audit:  Federal Deposit Insurance Corporation's 1993 and
1992 Financial Statements (GAO/AIMD-94-135, June 24, 1994). 


   FDIC REPORTS BIF AND SAIF
   COMPLIED WITH THEIR MAXIMUM
   OBLIGATION LIMITATIONS
------------------------------------------------------------ Letter :4

FDIC's maximum obligation limitation calculations for BIF and SAIF
show that as of December 31, 1993, BIF's assets and other funding
sources exceeded its obligations by $44 billion, and SAIF's assets
and other funding sources exceeded its obligations by $1.2 billion. 
This excess is described in the calculations as "Remaining Obligation
Authority." The obligation limitation calculations and explanatory
notes for BIF and SAIF are included as appendixes I and II,
respectively. 

Based on our review of FDIC's fourth quarter 1993 calculations and
explanatory notes for BIF and SAIF, nothing came to our attention
that would lead us to question the reasonableness of the amounts
reported. 


      ALLOCATION OF TREASURY
      BORROWING AUTHORITY
---------------------------------------------------------- Letter :4.1

In August 1993, FDIC amended its statement of accounting policy for
calculating the maximum obligation limitation to incorporate guidance
on how to allocate Treasury borrowing authority.  Under this
guidance, Treasury borrowing authority will be allocated based on
funding needs identified in recapitalization schedules FDIC prepares
for BIF and SAIF.  FDIC prepares these schedules semiannually when it
proposes the semiannual assessment rates to be charged to insured
institutions.  According to the guidance in the amended policy
statement, any Treasury borrowing authority exceeding projected
funding needs identified in the recapitalization schedules will be
allocated based on the proportion of the insured deposit base of each
fund to the total combined deposit base of the two funds.  In
addition, any alternative funding source already committed at the
time the maximum obligation limitation calculation is made will be
factored into the allocation process. 

Through December 31, 1993, FDIC allocated all $30 billion of its
Treasury borrowing authority to BIF.  This is in accordance with
FDIC's written procedures for implementing its allocation policy
statement.  According to these procedures, no portion of the $30
billion in Treasury borrowing authority is allocated to SAIF unless
SAIF (1) has full resolution responsibility as of the date of the
maximum obligation calculation or (2) is projected to have borrowing
needs over the next year to resolve troubled institutions for which
it currently has resolution responsibility. 


   SEVERAL FACTORS WILL AFFECT
   FDIC'S TREASURY BORROWING NEEDS
------------------------------------------------------------ Letter :5

To date, FDIC has not borrowed funds from Treasury to cover insurance
losses for either BIF or SAIF.  The timing and extent to which such
funding may be needed will depend on a number of factors, including
(1) the effect of future economic conditions on financial institution
failures and the cost of these failures to the insurance funds, (2)
the impact of legislation, and (3) future revenue streams available
to the funds.  These factors will also affect FDIC's ability to
rebuild the insurance funds' reserves to designated levels. 

FDICIA prohibits Treasury borrowing unless Treasury and FDIC have an
agreement which provides a repayment schedule and demonstrates that
income for BIF or SAIF will be sufficient to repay principal and
interest on Treasury borrowings within the period established in the
repayment schedule.  Separate agreements must be established for BIF
and SAIF. 

According to the recent cash flow projections FDIC submitted to the
Office of Management and Budget (OMB), FDIC does not anticipate that
BIF will need to borrow from Treasury for insurance losses through
fiscal year 1999.  FDIC has cautioned that its projections of
financial institution failures are subject to variables beyond its
control and that the reliability of the projections declines as the
time period covered by the forecast increases.  For example, FDIC's
cash flow projections are influenced in part by changes in economic
conditions and fluctuations in interest rates.  These factors can
affect the timing of financial institution failures and the closure
of institutions by the regulators. 

FDIC's borrowing needs can also be affected by legislative action. 
For example, until recently, SAIF was scheduled to assume full
responsibility for resolving troubled savings associations from the
Resolution Trust Corporation (RTC) on October 1, 1993.\4 However, the
Resolution Trust Corporation Completion Act (Public Law 103-204,
enacted on December 17, 1993) extended RTC's resolution authority and
provided RTC additional funding to resolve troubled institutions
identified by the Office of Thrift Supervision.  The act also
modified SAIF's available sources of funding for insurance losses. 

Specifically, the act extended RTC's resolution authority through a
date to be determined by the Chairman of the Thrift Depositor
Protection Oversight Board but no earlier than January 1, 1995, and
no later than
July 1, 1995.\5 The act also restored to RTC $18.3 billion\6 to
resolve troubled savings associations and provided that any of these
funds not used by RTC would become available for SAIF's insurance
losses during the 2-year period beginning on the date of RTC's
termination.\7 Additionally, the act amended section 11(a) of the FDI
Act by authorizing up to $8 billion to SAIF to cover losses incurred
by SAIF in fiscal years 1994 through 1998.  However, prior to
receiving funds from either source, FDIC must certify, among other
things, that SAIF is unable to cover its losses through insurance
premiums or through available Treasury borrowing without adversely
affecting the health of its member institutions and thus causing the
government to incur greater losses. 

According to the recent cash flow projections FDIC submitted to OMB,
FDIC does not anticipate that SAIF will need to borrow from Treasury
for insurance losses through fiscal year 1999.  As with its cash flow
projections for BIF, however, FDIC has cautioned that its projections
of financial institution failures are subject to variables beyond its
control and that the reliability of the projections declines as the
time period covered by the forecast increases. 

FDIC also considers assessment revenues in projecting its borrowing
needs.  For premiums due in the semiannual period beginning on
January 1, 1993, and thereafter, FDIC adopted a risk-based premium
system.  Under this system, federally insured institutions posing
higher risks of loss to the insurance funds are charged higher
premiums.  The assessment rates charged to federally insured
institutions range from 23 cents to 31 cents per $100 of domestic
deposits.  Recent FDIC estimates show the average assessments charged
to BIF-insured institutions to be 24.4 cents per $100 of domestic
deposits, an increase of about 6 percent over the assessment rate of
23 cents per $100 of domestic deposits in effect through calendar
year 1992.  FDIC's estimates show the average assessments charged to
SAIF-insured institutions in 1993 to be 24.9 cents per $100 of
domestic deposits, an increase of about 8 percent over the assessment
rate of
23 cents per $100 of domestic deposits charged in 1992. 


--------------------
\4 The Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) established RTC to resolve institutions whose
deposits had been insured by the Federal Savings and Loan Insurance
Corporation (FSLIC) that were placed into conservatorship or
receivership from January 1, 1989, through August 8, 1992.  The
Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991 (Public Law 102-233), enacted on December 12,
1991, extended RTC's resolution authority to institutions placed into
conservatorship or receivership through September 30, 1993. 

\5 However, any institution requiring resolution after the expiration
of RTC's resolution authority which had previously been under RTC
conservatorship or receivership may be transferred back to RTC for
resolution.  Through the expiration of RTC's resolution authority,
SAIF is responsible for the resolution costs of any federally insured
savings association that was not previously insured by FSLIC. 
Additionally, SAIF may also incur resolution costs related to certain
other institutions prior to assuming full resolution responsibility. 
Section 5(d)(3) of the FDI Act, as amended by FIRREA, generally
allows bank holding companies to merge their SAIF-insured
subsidiaries into their BIF-insured bank subsidiaries.  The resulting
banks would continue to pay a portion of their premiums to SAIF based
on the amount of savings association deposits acquired.  Accordingly,
in the event of failure or assistance, any loss would be allocated
between BIF and SAIF in proportion to the institution's deposits
insured by each fund.  FDICIA expanded on the FIRREA amendment to
allow an insured bank or savings association to acquire, merge, or
assume the deposit liabilities of the other type of insured
depository institution.  As with the FIRREA amendment, insurance
premiums and loss expenses are to be allocated between BIF and SAIF. 

\6 The act amended section 21A(i) of the Federal Home Loan Bank Act
by removing the April 1, 1992, deadline for obligating $25 billion
provided to RTC by Public Law 102-233 for resolution activity. 
Through April 1, 1992, RTC had obligated $6.7 billion of the $25
billion. 

\7 Under the act, RTC will terminate on or before December 31, 1995. 


      SIMILAR FACTORS COULD AFFECT
      EFFORTS TO REBUILD THE
      INSURANCE FUNDS
---------------------------------------------------------- Letter :5.1

Resolution costs and assessment revenues are also significant factors
to be considered in projecting BIF's and SAIF's future fund balances. 
In an effort to achieve a level of self-sufficiency, FDICIA requires
FDIC to develop a recapitalization plan for BIF that specifies target
ratios of reserves to insured deposits at semiannual intervals,
culminating in a reserve ratio equal to the designated 1.25 percent
reserve ratio in no more than 15 years.  At December 31, 1993, BIF
had an audited fund balance of $13.1 billion.  The most recent FDIC
projections contained in FDIC's revised BIF recapitalization schedule
show that BIF will achieve the designated ratio by the year 1996,
well within the 15-year period stipulated in FDICIA. 

SAIF's designated reserve ratio is also 1.25 percent of insured
deposits.  Until January 1, 1998, FDIC must set assessment rates at a
level that will enable SAIF to achieve the designated reserve ratio
within a reasonable period of time.  Beginning January 1, 1998, FDIC
must set assessment rates at a level sufficient for SAIF to meet the
designated reserve ratio according to a 15-year schedule.\8 As of
December 31, 1993, SAIF had an audited fund balance of $1.2 billion. 
FDIC's most recent projections show that SAIF will achieve the
designated reserve ratio by the year 2004.  However, such long-range
projections are subject to significant uncertainties.  Assumptions
concerning the level and cost of future financial institution
failures, changes in levels of industry assets and deposits, and
future assessment revenues are subject to considerable fluctuation
due to such factors as future economic conditions, interest rates,
and legislative action. 


--------------------
\8 FDIC may extend the date specified in the schedule to a later date
that it determines will, over time, maximize the amount of
assessments received by SAIF, net of insurance losses incurred by
SAIF. 


   FDIC HAD NO OUTSTANDING WORKING
   CAPITAL BORROWINGS AT YEAR-END
   1993
------------------------------------------------------------ Letter :6

FDIC has authority to borrow funds for BIF's or SAIF's working
capital needs from FFB, but the amount of its outstanding working
capital borrowings is subject to each fund's maximum obligation
limitation. 

During the fourth quarter of 1993, FDIC borrowed no funds from FFB
for either BIF's or SAIF's working capital needs.  FDIC repaid the
remaining balance of previous FFB borrowings on behalf of BIF on
August 6, 1993, and has not borrowed from FFB on behalf of SAIF. 


---------------------------------------------------------- Letter :6.1

We are sending copies of this report to the Acting Chairman of the
Board of Directors, Federal Deposit Insurance Corporation; the
Director, Office of Management and Budget; and the Secretary of the
Treasury. 

Please contact me at (202) 512-9406 if you or your staffs have any
questions concerning the report.  Other major contributors are listed
in appendix III. 

Robert W.  Gramling
Director, Corporate Financial Audits


BIF MAXIMUM OBLIGATION LIMITATION
CALCULATION AND NOTES AS OF
DECEMBER 31, 1993
=========================================================== Appendix I



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


SAIF MAXIMUM OBLIGATION LIMITATION
CALCULATION AND NOTES AS OF
DECEMBER 31, 1993
========================================================== Appendix II



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Steven J.  Sebastian, Assistant Director
Michael C.  Hrapsky, Audit Manager
Elizabeth Martinez, Senior Auditor
Dennis L.  Clarke, Senior Auditor

OFFICE OF GENERAL COUNSEL

Jeffrey A.  Jacobson, Assistant General Counsel
Helen Desaulniers, Attorney

